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The casual dining chain, Buffalo Wild Wings Inc. (BWLD - Analyst Report) recently reported third quarter 2012 earnings of 57 cents per share, which again missed the Zacks Consensus Estimate of 61 cents due to higher wing costs. The reported earnings were also lower than the year-ago quarter earnings of 61 cents per share.

Quarter Performance

Total revenue climbed 24.8% year over year to $246.9 million, but missed the Zacks Consensus Estimate of $255.0 million. Sales at company-operated restaurants surged 26.2% to $228.4 million, fueled by the opening of 55 new restaurants during the quarter compared with the prior-year quarter and higher same-store sales.

Franchise royalties and fees jumped 10.2% year over year to $18.4 million, thanks to 13 additional restaurants in operation at the end of the quarter compared with the year-ago quarter and an improvement in comps. Same-store sales escalated 6.2% and 5.8% at company-operated restaurants and franchised restaurants, respectively.

Average weekly sales at company-operated restaurants increased 6.3% year over year to $51,524 and at franchised restaurants climbed up 8.3% to $51,350.

Restaurant operating margin contracted 170 basis points (bps) to 17.6%, aided by a 270-bp hike in cost of sales to 31.2%, arising from a 70% surge in traditional wings price. This was partially offset by a 60-bp drop in operating costs to 15.2% (as a percentage of restaurant sales) and 30-bps fall in occupancy costs to 5.9% and 20-bps dip in labor cost to 30.1%.

Store Update

During the quarter, Buffalo Wild Wings opened 13 new company-owned restaurants and six franchised restaurants. Buffalo Wild Wings currently operates 343 company-owned restaurants and 511 franchised restaurants.

In the fourth quarter of 2012, the company plans to acquire nine franchised locations. Further, it plans to open at least 24 new company-owned and 20 franchised locations before the end of 2012. In 2013, the restaurant chain plans to unveil more than 60 company-owned and 45 franchised restaurants, and also expects to achieve the 1,000 units milestone by the end of the year.

Liquidity Position

Buffalo Wild Wings ended the quarter with cash and cash equivalents of $31.3 million and shareholders’ equity of $365.8 million.

Outlook

Management witnessed comparable sales growth of 3.8% and 5.6% at company-operated restaurants and franchised restaurants, respectively, for the first four-week period of the fourth quarter of 2012. However, the comps growth is slower than the prior-year period. The company is undertaking various initiatives like menu innovations, investment in marketing and  media spending to attract customers. Higher chicken wing prices will continue to be a headwind in the upcoming quarter, partially offset by menu price increases and cost saving initiatives at restaurants. Thus, margins will continue to struggle in the last quarter of 2012. Hence, for 2012, the company now expects net earnings growth of 15%, i.e. the lower end of its prior projection of 15%–20%.

Our Take

The company’s third quarter 2012 results were disappointing and earnings growth outlook for 2012 also remains low. Moreover, the comps growth for the upcoming quarter has not started on a great note. Hence, we expect the estimates to go down in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $3.27 and $3.28, respectively.
However, sales are expected to benefit in the fourth quarter from the football season.

Buffalo Wild Wings currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock. As a point of reference, one of Buffalo Wild Wings’ primary competitors Chipotle Mexican Grill Inc. (CMG - Analyst Report) recently reported third-quarter 2012 earnings of $2.27 per share, which fell shy of the Zacks Consensus Estimate of $2.30.

 

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